CHINA Law and Practice Contributed by: Borong Liu, Xiaoli Liu, Jingyi Lu and Zhijie Zhang, Zhong Lun Law Firm
ABSP can be recognised by the court as a true sale. As for an SPT, according to Article 15 and 16 of the Trust Law, the trust property is differenti - ated from other property which the settlor has not entrusted; after the establishment of the trust, when the settlor is dissolved, revoked or declares bankruptcy, and the settlor is not the only beneficiary, the trust survives and the trust property shall not be regarded as the estate or liquidation property of the settlor; meanwhile, the trust property is differentiated from the property owned by the trustee (inherent property), and if the trust is dissolved, revoked or declares bank - ruptcy, the trust property does not belong to its liquidation property. Based on the above provi - sions, in credit asset securitisations and CIBM business asset securitisations, the underlying assets generally will not be consolidated with the bankruptcy estate of the originator or the trustee. However, if the underlying asset itself is not a right independent of the originator, such as future accounts receivable, bankruptcy remote - ness cannot be effectuated even using a trust structure. 6.3 Transfer of Financial Assets True Sale v Secured Loan In China, the typical form of property security is the statutory mortgage or pledge, with a clear security agreement between the guarantor and the creditor, which is different from a sales con - tract. In practice, there is an atypical kind of security called “security by transfer”, whereby the debtor or a third party enters into a contract with the creditor to superficially transfer a prop - erty under the creditor’s name; if the debtor pays off the matured debt, the creditor shall return such property to the debtor or the third party; if the debtor fails to pay off the matured debt, the creditor could auction or sell the collateral, or
be paid off with the collateral based on its esti - mated price. Due to the similarity in form, such transactions are easily confused with true sales. If the court determines that the purpose of the property transfer is security rather than a true sale, it will decide following the security rules in the Civil Code. Based on limited judicial cases, when deciding the nature of a deal, a court tends to respect par - ty autonomy, taking an approach under which the text of the contract is closely analysed to determine whether its true meaning complies with the characteristics of a sales contract as defined under the Civil Code. The courts seldom use the equity principle to overturn the explicitly expressed will of the parties to a contract. Therefore, to achieve the target of a true sale and bankruptcy remoteness, at least the follow - ing factors need to be ensured in a transaction: • there is a true and explicit expression regard - ing the transfer of the ownership of the underlying assets in the relevant transaction documents; and • the transferee shall pay a reasonable consid - eration to acquire the underlying assets – the fairness of the consideration is primarily to ensure the transaction will not be revoked by the aggrieved party or its creditors/bank - ruptcy administrator as manifestly unfair or prejudicial to the interests of the creditors. A basic premise is implied in this type of transac - tion: the underlying assets can legally generate steady cash flows which can match the payment of the securitisation products. In some securitisation transactions, the origina - tor may commit to make up for a shortfall in cash flows of the underlying assets compared to the
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